05.10.11

Microsoft Will Screw Up Skype

The software giant’s bureaucratic mess is bound to screw the Internet phone company up. Dan Lyons on its history of botched acquisitions.

Now that Microsoft has snapped up the wonderful Internet phone company, the software giant’s bureaucratic mess is bound to screw it up. Dan Lyons on its history of botched acquisitions. Plus, Skype investor Marc Andreessen on his big pay day.

Skype just might be the most wonderful application on the Internet. Now it will be owned by Microsoft, which is buying the Internet telephone company from a set of private investors for $8.5 billion. It’s a stunning price, since those same investors bought the company only 18 months ago at a valuation of $2.75 billion.

But for me and 170 million other customers who love Skype, the scary aspect is this: Microsoft will screw it up.

Look at what they did with Danger Inc., an early mobile device maker that created the Sidekick, a really cool early smartphone. Microsoft bought it, smothered it, drove away the talent, and basically killed Danger in its crib. (Ironically, one of the people who left was Danger co-founder Andy Rubin, who went on to create Android, which he sold to Google—which didn’t screw it up. Now it’s taking over the mobile phone business while Microsoft, which once had a lead in that field, is struggling to stay alive.)

Or look at Yahoo. Microsoft CEO Steve Ballmer led a botched campaign to buy the popular Web portal, flailed miserably, and then came back and cut a deal in which Yahoo would use Microsoft’s own search engine, Bing. That has pretty much been a bust, too.

The key to Skype’s success has been its tremendous core team of engineers. Skype was founded in 2003 in Estonia with the basic idea to let people make free voice and video calls over the Internet. If you’ve ever used Skype, you know how good it is. It also generates about $1 billion in annual revenue by charging users for services like making calls from Skype to landline phones.

Microsoft says it intends to keep Skype operating at arms-length, as an independent division. Supposedly that will keep those brilliant engineers from bailing out.

The problem is that even if they’re left alone, the Skype engineers will now have to engage with lots of different teams at Microsoft. The software giant apparently wants to integrate Skype across all sorts of products, like the Office suite, the Windows Phone 7 mobile operating system, and the Xbox videogame console. The idea will be to add voice and video calling to all of Microsoft’s software, both in the enterprise and consumer space.

The goal is also to give Microsoft a chance to compete against Google and Apple, which both have launched Skype-like products recently. Google added voice calling to Gmail; it works great and lets you make cheap overseas calls. Apple has Facetime, a videoconferencing system that’s built into the iPhone.

Integration is where the problems are going to kick in. Internally, Microsoft has become a huge, bloated, bureaucratic, dysfunctional nightmare.

Neither of these products has put a dent in Skype. The company is still adding 500,000 registered users a day. Users have downloaded 50 million copies of Skype for the iPhone, even after Facetime became available.

So Microsoft will have a great and powerful weapon both for the enterprise and for consumers.

That sounds great. But that integration is where the problems are going to kick in. Internally, Microsoft has become a huge, bloated, bureaucratic, dysfunctional nightmare. When I think of those brilliant engineers at Skype trying to deal with their counterparts at Microsoft—drones who are consumed with internal rivalries, slowed down by bickering and hierarchy, obsessed with trying to figure out whose butt you need to kiss to get a better performance review and bigger bonus—well, it makes me want to cry.

Marc Andreessen, one of the investors who sold Skype to Microsoft, says the engineers at Skype are “committed to the mission.” Let’s hope so—for Microsoft’s sake, and for the sake of all the rest of us, who depend on Skype and love it.

Dan Lyons is technology editor at Newsweek and the creator of Fake Steve Jobs, the persona behind the notorious tech blog, The Secret Diary of Steve Jobs. Before joining Newsweek, Lyons spent 10 years at Forbes.